A Premium Reimbursement Arrangement is an agreement for an employer to reimburse employees for their individual health insurance premium expenses. This section discusses different types of Premium Reimbursement Arrangements and why they work.
There are two main types of Premium Reimbursement Arrangements.
1. Tax-Preferred Premium Reimbursement Arrangement: The most common type of Premium Reimbursement Arrangement is a tax-preferred plan. With this approach, employers use a Section 105 Medical Reimbursement Plan to reimburse employees for their substantiated individual health insurance costs on a pre-tax basis. This type of plan is sometimes called a Healthcare Reimbursement Plan (HRP).
2. Taxable Health Insurance Stipend: Employers may also set up a taxable Premium Reimbursement Arrangement. With this approach, employees are provided a monthly taxable stipend to purchase individual health insurance, and do not show proof as to whether or not they actually purchase health insurance.
Tip: In this guide, we are focusing on tax-preferred Premium Reimbursement Arrangements.
With a Premium Reimbursement Arrangement:
The company sets monthly healthcare allowances.
Employees purchase their own health plan.
Employees submit a reimbursement request.
One the request is approved, the company reimburses employees for the approved expense via payroll, check, or direct deposit.
Premium Reimbursement Arrangements are gaining widespread adoption because individual health insurance is now better, and less expensive, than group health insurance. Premium Reimbursement allows employers to offer better health benefits at a lower cost.
Employers and employees save money because, on average, individual health insurance costs up to 60% less than group health insurance. And, with individual health insurance, employees get to:
Pick the plan that best fits their needs, including the doctors, for about half the cost of an equivalent group plan.
Keep their individual health insurance policy for as long as they want, completely independent of employment.
Receive access to the federal premium tax credits. Families are eligible who earn less than $100,000 per year (or a single person earning less than $45,000 per year).
Premium Reimbursement Arrangements are also an attractive solution because:
Reimbursements can be tax-deductible to the employer, and employees can receive reimbursements tax-free.
The employer gains fiscal control and predictability over their health benefits budget.
There are no minimum or maximum contribution amounts, and no minimum participation requirements.